2024 (5) TMI 639 - AT - Income Tax

ITAT rules surrendered income from survey should be taxed as business income, not under section 115BBE special rates

Gurinder Makkar Versus The DCIT CC-3, Ludhiana

ITAT Chandigarh allowed the assessee's appeal against additions under sections 68/69A/69B taxed at special rates under section 115BBE. The tribunal held ... Addition u/s 68/69A/69B and taxed the same u/s 115BBE - Surrendered income in survey action u/s 133A on account of excess stock, discrepancy in cost of building and expenditure in violation of Section 40A(3) - AO observed that the surrender relates to unexplained investment - HELD THAT:- In particular, for the deeming provisions of Section 69B to be attracted in the instant case, there has to be a finding that the assessee has made investments in the stock during the financial year and such investments are not fully recorded in the books of accounts so maintained by the assessee, and the assessee offers no explanation about the nature and source of the investments or the explanation so offered is not found satisfactory in the opinion of the AO, the latter can proceed and the value of the investment may be deemed as income of the assessee for such financial year. As we refer to the statement so recorded of the assessee during the course of survey, Revenue has not pointed out that the excess stock has any nexus with any other receipts other than the business being carried on by the assessee. There is thus a clear nexus of stock physically so found with the stock in which the assessee regularly deals in and recorded in the books of accounts and thus with the business of the assessee and the difference in value of the stock so found is clearly in nature of business income. Apparently, the AO has failed to appreciate the statement of the assessee recorded during the course of survey and other documents and findings of the survey team which are very much part of the records in correct perspective. We therefore find that the nature and source of such unaccounted stock is nothing but arising out of assessee’s business operations. There is no physical distinction between the accounted stock and unaccounted stock. No such physical distinction was found by the Revenue either. We therefore find that the difference in stock so found out by the authorities has no independent identity and is in terms of value terms only and thus part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset which existed independently and thus, what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific asset and the difference should thus be treated as business income. Surrender on account of cost of building the fact that the assessee has honoured the surrender so made inspite of the fact that there is no corroborative material against the assessee, the same can’t be held against the assessee and more so, cannot form the basis for invocation of deeming provisions as has been done in the instant case as the conditions stated therein are not satisfied. Merely the fact that survey has taken place and certain expenditure on estimated basis has been surrendered doesn’t satisfy the requirements for invoking the deeming provisions as has been done in the instant case. Accordingly, the order of the ld CIT(A) is set-aside and the AO is directed to tax the surrendered income at normal rates as applicable to the business income. Disallowance of depreciation on such cost of construction, we find that there is no legal and justifiable basis to disallow the depreciation. Once the assessee has surrendered the amount on account of cost of extension, renovation and the same has been brought in the books of accounts, the same will form part of block of the building and the assessee will be eligible for claim of depreciation thereon. As we have noted earlier, no bills/vouchers have been found during the course of survey, therefore, there is no basis to invoke section 43(1) in the instant case and thus, the depreciation so claimed is directed to be allowed. Surrender on account of disallowance u/s 40A(3) there is no finding that cash expenditure has been found and which has not been accounted for and in such a situation, we fail to understand as to how the deeming provisions can be invoked in this regard. Where the expenditure has been held disallowable in terms of section 40A(3) of the Act which means that certain expenditure has been incurred, accounted for in books of accounts and has been found to be incurred in cash in violation of section 40A(3), the question of unexplained expenditure or unaccounted expenditure doesn’t arise for consideration. Hence, the action of the AO in invoking the deeming provisions in this regard is set-aside. Thus the income so surrendered during the course of survey cannot be brought to tax under the deeming provisions and has to be assessed to tax under the head “business income”. In absence of deeming provisions, the question of application of section 115BBE doesn’t arise and normal tax rate shall apply. The AO is thus directed to assess the income under the head “Income from Business/profession” and apply the normal rate of tax. Assessee appeal allowed. Issues Involved:1. Taxation of surrendered amount under Section 115BBE.2. Confirmation of addition under Section 143(3).3. Allegation of double taxation on surrendered amount.4. Disallowance of depreciation on building.5. Confirmation of order under Section 143(3).6. Invocation of Section 68.Summary:1. Taxation of Surrendered Amount under Section 115BBE:The primary issue was whether the surrendered amount of Rs. 50,53,000/- should be taxed under Section 115BBE or as business income. The assessee argued that the excess stock found during the survey was part of regular business stock and should be treated as business income. The Tribunal agreed, citing that the stock was part of the regular business operations and not an unexplained investment. The Tribunal referenced multiple judgments, including those of the Jaipur and Ahmedabad Benches, which supported the view that such surrendered amounts should be treated as business income and not under Sections 68/69A/69B.2. Confirmation of Addition under Section 143(3):The assessee contested the addition of Rs. 29,23,000/- made by the AO under Section 143(3). The Tribunal found that the AO had incorrectly applied the deeming provisions of Section 69B to the excess stock and other surrendered amounts. The Tribunal directed that these amounts should be assessed under the head 'business income' and not as unexplained investments.3. Allegation of Double Taxation on Surrendered Amount:The assessee claimed that taxing the surrendered amount again would lead to double taxation. The Tribunal agreed, noting that the assessee had already paid taxes on the surrendered amount by treating it as 'Income from other Sources.' The Tribunal emphasized that double taxation is against the principles of natural justice.4. Disallowance of Depreciation on Building:The AO had disallowed depreciation of Rs. 70,000/- on the building, arguing that the surrendered amount on account of building construction could not be considered part of the actual cost. The Tribunal disagreed, stating that once the surrendered amount was brought into the books, it should form part of the block of the building, making the assessee eligible for depreciation.5. Confirmation of Order under Section 143(3):The assessee's general grievance against the order passed under Section 143(3) was addressed by the Tribunal by setting aside the AO's application of the deeming provisions and directing the AO to assess the surrendered income under 'business income.'6. Invocation of Section 68:The Tribunal found that the AO had incorrectly invoked Section 68 for the surrendered amounts. The Tribunal emphasized that the surrendered amounts were part of the business income and not unexplained cash credits, thus Section 68 was not applicable.Conclusion:The Tribunal ruled in favor of the assessee, directing that the surrendered income should be assessed under the head 'business income' and not under the deeming provisions of Sections 68/69A/69B. Consequently, the application of Section 115BBE was deemed invalid, and the normal tax rates were to apply. The Tribunal also allowed the depreciation claim on the building and set aside the AO's disallowance.